Zovio Inc.

Good afternoon and welcome to Zovia's second quarter 2021 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Vicky Shrey, Executive Vice President, Chief External Affairs Officer. Please go ahead.

Thank you and good afternoon. Zovio's second quarter 2021 earnings release was issued earlier today and is posted on the company's website at www.zovio.com. Joining me on the call today are George Pernsteiner, Interim CEO, Office of the CEO, and Board Chair, Chris Bond, Executive Vice President of Operations and Office of the CEO, and Kevin Royal, Executive Vice President, Chief Financial Officer. We would like to remind you that some of the statements we make today may be considered forward-looking. including statements regarding university partners and other programs and services, our ability to grow through acquisition, our ability to successfully integrate and leverage acquired companies, future revenue growth, EBITDA, financial and related guidance, and commentary regarding fiscal year 2021 and later. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events. except to the extent required by applicable securities law. On the call today, we will also discuss certain non-GAAP financial measures. In our earnings release, you will find additional disclosures regarding these measures, including reconciliations of these measures with U.S. GAAP. Note that these non-GAAP financial measures are intended to supplement GAAP financial information and should not be considered as a substitute for our GAAP results. please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2020, as well as our quarterly report on Form 10-Q for the quarter ended June 30, 2021, which we filed with the SEC earlier today for a more detailed description of the risk factors that may affect our results. You may obtain copies from the SEC or by visiting the investor relations section of our website. At this time, it is my pleasure to introduce our interim CEO, George Pernsteiner.

Thank you, Vicki, and welcome to our second quarter 2021 earnings call. Starting with our results for the second quarter 2021, we delivered revenue and other revenue of $69.2 million. and incurred a net loss of $4 million, or a loss of 12 cents per diluted share. Excluding non-GAAP items, our non-GAAP net loss for the second quarter of 2021 was $800,000, or a loss of 2 cents per diluted share. Last quarter, we discussed the enrollment headwinds we faced at UAGC as a result of the new brand, as well as the longer-term impact of the COVID pandemic similar to many higher education institutions. According to the Persistence and Retention Report recently issued by the National Student Clearinghouse Research Center, new enrollment of college students in the United States, particularly of first-time students and students underrepresented in higher education, students of color, those from low-income backgrounds, and older students continue to show overall decline. In addition, the rate of college student persistence declined two percentage points in 2020, the largest one-year drop since 2009, when the Clearinghouse began reporting this measure. While COVID has had an impact on enrollments nationwide, this new, more virtual world has also presented opportunities for higher education to reimagine itself. Now more than ever, providing students an online platform for learning that is not only robust but engaging will prove critical. Colleges and universities are looking for a partner like Zovio that has demonstrated a track record of supporting the student life cycle and delivering favorable student outcomes. I believe Zovio is well positioned to bring technology and innovative services to institutions to help learners succeed. So those long term strategy is centered on bringing education opportunities to learners where they are. To do this, we will deliver education services that meet the diverse needs of universities employers and learners. In addition, we are enhancing our programs and services and we are expanding our skills to employment offerings to empower learners to better connect with in demand jobs. As we noted, we took actions to further strengthen Zovio operationally, as well as better position the company for long-term growth. These actions were centered on realigning our operations, including breaking down internal silos and increasing collaboration across the team, as well as broad-based cost reductions. We took additional actions in the second quarter, which Kevin will discuss shortly, that will bring our total expected savings to $40 million in calendar 2021. We are excited for what the future holds for Xovio and our ability to play an important role in enabling learners to advance their educational goals. Let me provide a brief update on the progress we have made in our search for Xovio's next chief executive officer. As mentioned on our last call, we have formed a search committee which has made good progress identifying the right blend of vision and talent to lead Xovio as an education technology services company. We have been impressed by the quality and caliber of individuals who have expressed interest in joining us as we work to set the company on a growth trajectory to deliver shareholder value for many years to come. While the work is not yet complete, we have confidence that our process will result in identifying the right leader for Zovio's future. With that, let me turn the call over to Chris to run through the highlights for the quarter.

Thank you, George. We continue to advance our Sovio growth segment, while at the same time enhancing our robust and flexible offering for the university partners in the university partners segment. These efforts are creating value, and we believe they positioned us well to drive enhanced performance over the long term, with a differentiated and flexible value proposition. that spans the student life cycle, we are meeting the growing needs of our current and future partners, both at the undergraduate and graduate level, especially in engaging working adults and historically underrepresented students. Our growth segment, which includes our subsidiaries, Fullstack and TutorMate, has continued to perform well. In the second quarter of 2021, Zovia Growth delivered revenues of $6.9 million, growing 39.3% for the quarter year over year. These services that Fullstack and TutorMeet provide enhance Zobio's ecosystem to support learners' education and career aspirations by building on our existing capabilities to meaningfully serve higher education institutions, bridge the education to employment gap, help enterprises upskill and educate their employees. We have the opportunity to be a premier player in a large, evolving, and growing industry, and Zobio Growth is a critical piece of that strategy. Our track record of innovation will allow us to offer services to our university partners that span the student journey and support the best possible outcomes. Further demonstrating the strength of our growth segment, TutorMe was honored in early June as a double Gold Stevie Award winner in the 2021 American Business Awards. In addition, during the second quarter of 2021, TutorMeet continued to execute new partnership agreements from universities to corporations to school districts, bringing their total partnership count to over 250, an increase of 230% year over year. In the second quarter, total customer and partner hours usage increased over 120% year-over-year, maintaining the strong momentum we have seen in recent quarters. Fullstack also added new partners during the quarter and leveraged new partnerships that came online. In the second quarter, Fullstack added Cleveland State University to its roster to bring accelerated tech skills training to Ohio. as well as the University of Texas Dallas and the University of New Mexico. We are excited about the opportunities these universities have to offer. As the end of the second quarter, this brings Fullstack to 16 new partnerships since the acquisition in April of 2019. In addition, we launched a data analytics boot camp, which has been well received. Our outlook for Xovia growth remains strong. For the remainder of 2021, we anticipate Fullstack adding between three and six new university partners, and TutorMe adding between 30 and 40 new partners. We will continue to invest for growth in this segment, including strategic sales and marketing initiatives to bring our new partners online, while at the same time maintaining our momentum with new partner acquisitions. Turning to our university partner segment, UAGC enrollment in the second quarter was in line with what we anticipated. Additionally, in mid-May, UAGC announced a new partnership agreement with a large corporate partner, Walgreens, that will include certain scholarships and reduced tuition for bachelor's and master's programs for qualifying employees. Our relationship with UAGC continues to mature. In this vein, in mid-July, we brought the leaders of Zovio and UAGC together for a two-day in-person summit to outline the initiatives that will drive enrollment, advance programs, and support strong student outcomes. While it's too early to talk specifics, we believe we have a strong action plan and common goals to advance the relationship. Zovio remains well-positioned as we bring a clearly differentiated offering to our clients. We have a robust platform of technology and services that institutions, corporations, and learners clearly value and will set the stage for diversified growth. As I mentioned last quarter, we signed a new partnership with a mid-size university. While this is a more narrow engagement, this partner understands the value that Zovio is able to bring as it strives to achieve its objectives. And we are looking forward to building that long-lasting relationship. In addition to our recently signed partners, we continue to build an attractive pipeline of opportunities with institutions, as many are seeing the value to enhance student engagement and improve the likelihood of student success through our services. We remain confident in our ability to add partners in UPG during 2021. Now, I will turn the call over to Kevin Royal to review our financial and operating results.

Thank you, Chris. Before I begin, as a reminder, our business model period over period has shifted significantly as a result of our transition to an education technology services company in December 2020. As such, for comparability purposes, in addition to providing the GAAP results for the second quarter of the prior year, I will be highlighting certain related pro forma amounts for that period. Revenue and other revenue for the second quarter of 2021 was 69.2 million compared to 103.9 million for the same period in the prior year. On a pro forma basis, revenues for the second quarter of 2020 were estimated to be 76.2 million. The decrease on a gap basis is primarily related to the divestiture of Ashford University and the shift to the ed-tech business model, partially offset by an increase in the Zovio growth segment revenues. For the second quarter of 2021, technology and academic services were $18.1 million, or 26.1% of revenues, compared to $17.2 million or 16.6% of revenue for the second quarter of the prior year. On a pro forma basis, these expenses for the second quarter of 2020 were estimated to be $17.6 million or 23.1% of revenue. On a GAAP basis, as a percentage of revenue, these costs increased year over year and were primarily driven by increased labor costs and license fees partially offset by decreases in consulting and outside services. Counseling services and support for the second quarter of 2021 were $23.2 million, or 33.5% of revenue, compared to $23.5 million, or 22.6% of revenue, for the comparable prior period. On a pro forma basis, these expenses for the second quarter of 2020 were estimated to be $22.6 million or 29.7% of revenue. On a GAAP basis, as a percentage of revenue, these costs increased primarily due to employee costs and facilities costs. Marketing and communication expenses for the second quarter of 2021 were $21.7 million or 31.4% of revenue compared to $21.7 million or 20.9% of revenue for the prior year. On a pro forma basis, these expenses for the second quarter of 2020 were estimated to be $21.5 million or 28.2% of revenue. On a GAAP basis, as a percentage of revenue, these costs increase due to advertising and employee costs. General and administrative expenses for the second quarter of 2021 were $8.4 million, or 12.2% of revenue, compared to $11.6 million, or 11.1% of revenue, for the comparable prior period. On a pro forma basis, these expenses for the second quarter of 2020 were estimated to be $10.2 million or 13.3% of revenue. On a GAAP basis, as a percentage of revenue, these costs increased due to employee costs, insurance, and other administrative costs. We did not have any university-related expenses for the second quarter of 2021 as compared to $24.2 million or 23.2% of revenue for the prior year period. On a pro forma basis, these costs would not have existed in the prior year. These expenses represent costs related to the university prior to the sale in December 2020. Restructuring and impairment charges for the second quarter of 2021 were $2.3 million, or 3.4% of revenue as compared to $0.5 million, or 0.5% of revenue for the prior year period. During the second quarter of 2021, we recorded an income tax benefit of $0.2 million. Our effective tax rate before discrete items for the second quarter of 2021 was low single digits, and we anticipate this trend to continue for the remainder of the year. As a result, our net loss for the second quarter of 2021 was $4 million, or a net loss of $0.12 per deleted share. This is compared to net income of $5.1 million or net income of $0.16 per diluted share for the second quarter of the prior year. Our non-GAAP net loss for the second quarter of 2021 was $0.8 million or a loss of $0.02 per diluted share compared to the non-GAAP net income of $8 million or income of $0.24 per diluted share for the second quarter of the prior year. The non-GAAP net loss for the second quarter of 2021 excludes restructuring and impairment of $2.3 million, separation and conversion costs of $0.3 million, acquisition costs of $0.5 million, other non-GAAP costs of $0.4 million, and an income tax benefit of $0.3 million. As of June 30, 2021, we had unrestricted cash and cash equivalents of $24 million as compared to $35.5 million as of December 31, 2020. In addition, We had restricted cash of $13.3 million at June 30, 2021, as compared to $20 million at December 31, 2020. Requirements that had previously restricted certain of these funds will no longer be relevant, and we expect that an additional $2 million of the restricted cash amount will become unrestricted during 2021, moving to unrestricted cash and cash equivalents. There was 16.3 million of cash used in operating activities during the year-to-date period into June 30, 2021. By comparison, we had 6.7 million of cash provided by operating activities during the same period in the prior year. The year-over-year change in cash provided by operating activities was primarily driven by the decrease in earnings, partially offset by changes in the working capital accounts. The net accounts receivable was $7.9 million as of June 30, 2021, compared to $7.2 million as of December 31, 2020. Capital expenditures for the year-to-date period into June 30, 2021 were $0.7 million as compared to $1.6 million for the same period last year. Turning to our outlook for 2021, for Zovio growth, from a revenue perspective, we still anticipate the segment's revenue to grow approximately 30% year-over-year and anticipate generating an EBITDA loss of between $6 to $8 million in 2021. this planned investment will decrease consolidated EBITDA margins in the near term. Longer term, we expect the segment to grow at least 30% annually through 2025 and be profitable beginning in 2023. We recently took actions to reduce our cost structure to more appropriately align it with both our revenue expectations and the nature of our new post-Ashford business. As we move through the second quarter, our enrollment began to stabilize at levels slightly lower than anticipated, causing us to further reduce our planned spending. Our total year-to-date cost reduction efforts will yield approximately $40 million of savings in calendar 2021 and approximately $60 million in annualized savings going forward compared to planned spending levels. For 2021, we continue to expect total consolidated ZOVO revenues to be in the range of $265 to $275 million and non-GAAP EBITDA to be breakeven to a slight loss. At this time, I will ask our operator to open the phone lines for your questions.

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Alex Paris with Barrington Research. Your line is open.

Hi, guys. Thanks for taking my questions. I think I'll start first with the university partners segment and UAGC specifically. We talked a lot about it on the Q1 call and since, and specifically since. You've talked about a shift in prospective students coming from the West, Arizona, California, Texas, and away from the south, which was Ashford University's campus. source of significant enrollment. You said that the students are taking longer to make a decision, but conversion rates are higher. There were more inquiries at the graduate level as opposed to undergraduate. There were positive early signs, and then specifically in military, you're starting to see some improvement there as well. This is all said on the last call and in a conference appearance since. I was wondering if you can update the current state of the UAGC efforts.

Yeah, thanks for the question, Alex. We're still seeing that shift in geography in terms of the inquiries that are coming through. The conversion continues to hold strong, and that's something to feel good about from an operational cadence. With respect to the military, we I think have done some good things to continue to message to the military with the new brand, and I think that's having play well operationally. So all the things that we provided in the last quarter, we're still seeing those trends. And, you know, as the market shifts a little bit, our ability then to sort of calibrate from a training standpoint allows us to better service those demographics. And we're starting to see that.

Great. And then again, on the last call, I think you said that April new enrollments were down 25% year over year at UAGC, but you were seeing some signs of stabilization. In your prepared comments, you said that you've seen that stabilization, but it's been at a little bit lower level than you had expected or hoped. Can you give us a little bit more color there, maybe on May and June?

Yeah, we, again, continue to see stabilization more than we've seen in the last earnings call that we had. And so, you know, that's good. And I think that's part of our ability to be able to speak to the new brand and to build that relationship with our partner in University of Arizona Global Campus. All those things are very positive. In fact, we had in July – As I referenced, we had an in-person summit really to map out a number of very strong new enrollment and growth initiatives. While it was too early to give you specifics on that, we came out of that meeting, both of us, feeling very good about the work that we've done. And we've got some short-term initiatives that will begin to play in the market here very soon. And we've got some longer-term initiatives but it was a very productive meetings. I think that was your strong sentiments from both sides.

So when you say stabilization, you're just saying it's not as bad as negative 25%, right? Or getting closer to zero, but certainly not growing yet at this point.

That's correct, Alex. Probably closer to a 20% decline versus the 25%. And recently we are seeing stabilization in our total enrollment.

And that's a function of improved continuation of students and fewer graduations?

It's a function of obviously adding new enrollments to the mix. It's a function of increased persistence and working with get students that even drops, getting them back to reentry. So there's a number of moving parts there that drive our total enrollment. Those all are either stabilized or in some areas showing some slight improvement.

Okay, good. It sounds like there's a lot you can't talk about yet at this stage on UAGC. But you say you're – how would you qualitatively, you know, put it? You're more encouraged than you were three months ago about the prospects for UAGC?

Yeah, I think that would be a good way to frame the relationship. I think we're – we haven't been in a bad place. I think we're in a better place today. And I think that summit meeting, I think, did both sides a great deal of – service to help grow the business, both on the new enrollment and total enrollment side.

Okay, good. And then while still on university partnerships, you have the smaller deal, the midsize school. You can't give the name yet. I think it was your hope at the outset of the year that you'd have one to three such additional contracts this year. Is that still the target?

Yeah, I think we're feeling optimistic, you know, but again, you know, some of these things take a little longer. So, but I think we've got, I think, an attractive pipeline that looks good.

Okay. Thank you. And then, so I have the updated guidance. When do you think you'll be in a position to give 2022 guidance?

So I think given the budget cycles that we're on, that we more likely than not, Alex, will not provide that guidance until our third quarter call in late October, early November at the earliest. And depending on our visibility, that could push out until our fourth quarter call in the February time frame.

All right, I would encourage you to give some sort of targets, goals, don't call it guidance, but give us some sort of idea on, you know, if we're going to, you know, we're in the valley here and we're looking to the other side, you know, to whatever extent you can help us there, looking to the other side, we'd appreciate it. And then I guess the last quick question is – Cash, you discussed cash, how $8 million came out of restricted cash in the second quarter, another couple million to go between now and year. What do you expect cash to be at year end?

I think the latest forecast that we're looking at is roughly $40 million as of the end of the calendar year.

Okay, so that's kind of unchanged from the last quarter, which is good.

That's correct.

Okay, great. Thank you. That answers my questions for now. I'll get back in the queue.

Your next question comes from the line of Terry Vu with Water Power Research. Your line is open.

Yes, good afternoon, Chris and Kevin. You covered quite a bit on the call and with Alec, but I think you mentioned in terms of the cost saving, you're going from $40 million annualized to $60 million annualized. Is that correct?

That is correct, Terry.

Okay. And then you mentioned meeting with a UAGC. Are there any plan of action that you could share with us? Maybe some qualitative or some illustration of the kind of thing that you think you can do?

Just on a high level, Terry, I think we focused on two areas. One, what can we do to continue from an initiative standpoint, continue to sort of drive in a good way new enrollment. And so there was a lot of good conversation around that area. The second area was around persistence of our existing students. What things can we continue to give students and support them where they're at in their student journey, life cycle? And we've got a number of things mapped out. I think here soon we'll be able to provide a little more insight into what those are. Again, as I said, some of these will take place pretty quickly, and then some of these take a little longer time. But I think we'll be able to message that and give you a little more insight as to the specifics of what those are and how impactful they'll be.

Okay. In terms of the help you're getting from University of Arizona, helping UAGC, any color you can give at this point?

No, not at this point. I think we work building that relationship with UAGC, and obviously UAGC has that relationship with the University of Arizona. So it's in that vein that we're continuing to open up a dialogue where there's opportunities for uh for you know improvement in various areas and we'll continue to work in that spirit um you know i think there's i think that the point i would make that there is an open dialogue between you know university of arizona global campus obviously zovio and university of arizona so that's a healthy and that's a good thing from which to build on okay and then

On 4STAC, you mentioned, is that a new program? So we have cybersecurity and data analytics, and there's a third program too, right?

We have the one. I think it was the boot camp, the data analytics. Yeah, these are newer programs that we're putting out into the market that are, you know, resonating with certain audiences. So that's one just of late that is really has done quite well.

Okay. So when you have a new partner, do you usually start with the full menu or you start with cybersecurity and then you add on?

You know, it's a great question. It really, it just depends on the university partner in terms of what they want. You know, a partner, perhaps a LSU is more looking at a full suite of offerings where other schools are looking at more of a limited, you know, programmatic list. So it just really depends on where they're at in that space. And some may start a little on a smaller scale. Some are a little more robust. And it just, there's, you know, I wouldn't say there's no rhyme or reason, but it just varies by university partner in terms of what they're looking for. But I think that initial part of whatever programs or programs we launch, getting them up and running and successful allows us to, I think, build on that.

Okay. And then maybe a last household question for Kevin. So we're going to generate cash in the second half of the year. I think I understood that correctly, right?

That is correct.

Okay. So we'll go from 2037 to over 40 million or so in, okay, in total cash. Or is the 40 million cash and restricted or just unrestricted cash?

That's unrestricted cash, Terry.

Okay. Okay, great. Thank you very much.

Your next question comes from the line of Greg Gibas with Northland Securities. Your line is open.

Hey, guys. Thanks for taking the questions. If I can follow up on the military side, when we think about your efforts to – or I guess that you're taking to remediate some of the branding-related issues that you had with them following the brand change – How close, I guess, would you say we are to rebuilding that brand image? And, you know, do you expect to see any long-term impacts there? You know, would you say we're kind of halfway to recovering military interest? Just trying to gauge where we stand today.

I think, you know, it's hard to say whether we're halfway there, fully there, or a quarter of the way there. I think what's good is the fact that the steps that we've taken to, I think, re-solidify, you know, working with the military has started. I think our ability to message our brand, our new brand to the military, has started. And I think we're starting to see some of those dividends. I mean, we still have some headwinds, if you will, but the fact that I think we're in a slightly better place with the military and we have something to build on, I think it gives us some optimism in the future.

Okay, got it. And, you know, if I could touch on the Walgreens partnership too, you know, it seems like UAGC scholarship partnership there is a pretty nice way to accelerate, you know, interest with a new group of these nationwide employees. I was just wondering, you know, if you could talk a little bit more about your thoughts there and if you're seeing additional opportunities with other corporate partnerships and if so, when some of those might materialize.

Yeah, we've got a very, I think, healthy pipeline in the work with our corporate team. That area of our business continues to do very well. We've got, I can't reference them now, but we've got some other very marquee, if you will, corporations that we're currently in dialogue with. And I think those are going to come to fruition here fairly soon. But I think, you know, the Walgreens was a good step. I think we did a good job with them. And I think we can leverage that experience that we've had to be able to take that message on to both other, you know, larger, medium-sized corporations. So I think it's a good step in the right direction.

Okay, great. Regarding the $40 million in cash savings this year, 2021, and then that turning into kind of equating to $60 million savings on an annual basis, could you just walk us through a little bit more specifically where those savings are coming from?

Sure. A lot of the savings are in taking a look at the company and really eliminating administrative functions that are not needed as we've transitioned to an educational technology company. So we had some leftover functions from being a for-profit education company. We certainly dealt with that. We dealt with a lot of duplication as it related to some of our student-facing functions. So we were able to reduce costs in our operation area, which is clearly our largest area of spending, without having an impact that we provide, an impact on the services that we provide to the University of Arizona Global Campus. And then we just, we really dove in and we really trimmed that cost. Some things that we may have relied on others and outsourced in the past, we brought in house and we're handling ourselves.

Great. Yeah, that's helpful, Kevin. I guess last one for me, it seems like full-stack and two-to-three partnerships, you know, in terms of the additions are cracking really well relative to your full-year expectations. And, you know, I appreciate the update, too, on kind of your longer-term look on Novio growth as a whole, you know, for the foreseeable future, that is. And I guess I just wanted to ask if there's maybe any trends or changes to customer demand for those two offerings, whether it's positive or negative. And then also, I guess, regarding full-stack launching the data analytics like you talked about recently. You know, I understand if you don't want to be specific, but, you know, you expect to launch maybe new programs that might garner additional interest in the foreseeable future?

Yeah, I think, you know, being in tune with what the market needs are is important. And, you know, so I think we've got a good sense working with our, you know, university partners in terms of what programs they're looking to build. And I think an important part of our growth strategy will be continue to provide, you know, programs and products that resonate with, you know, the consumers, right, in terms of, you know, how the market's growing and shifting. And we've got to be aligned with that and in some ways be on the front edge to, make sure that we're providing things at the time that's needed and be able to support them and make sure that we're constantly updating the curriculum so it's relevant to the workplace.

Great. Thanks, guys. Appreciate it.

Are there no further questions at this time? I would like to turn the call back over to Chris Pond for any closing remarks.

Again, we'd like to thank all of today's callers for their interest in Xovio, and we thank you for your participation on the call today. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect.